WTO World Trade Report focuses on subsidies

Government subsidies can be useful instruments
in correcting market failures and working towards social objectives but
can also distort trade and provoke strong responses from trading
partners, according to the WTO’s 2006 World Trade Report which was
launched today.

“WTO
economists have carefully scrutinized the use and the impact of government
support in a variety of sectors. While some subsidies can benefit society and
can offset the negative externalities of economic activity, other types of
government support are clearly more controversial and can be damaging. One
significant part of our Doha round negotiations involves reducing subsidies
which distort trade while encouraging governments to use other forms of support
which can facilitate development and environmental protection. Shifting support
in this way is politically difficult and requires determination and courage, but
the evidence is clear that such reforms can level the playing field and provide
real rewards across the board,” said Director-General Pascal Lamy.

The incidence and the impact of subsidies remain
seriously under-researched. Many governments maintain extensive subsidy
programmes at the national and sub-national levels, and invoke a multiplicity of
objectives to justify the programmes. Because subsidies can be trade distorting,
WTO Member governments must notify the organization of any such support. Yet few
governments fully meet their notification obligations under the WTO,
contributing to a serious lack of information and transparency on the use and
effect of subsidies. The absence of systematic information is aggravated by the
lack of common definitions of subsidy practices. The Report begins with a review
of attempts to define subsidies. It goes on to consider what economic theory
tells us about the effects of subsidies, providing a guide for assessing the
desirability of different kinds of subsidy programmes. The authors of the Report
examine the reasons governments give for using subsidies, and assess the
incidence of subsidies in various industries and sectors. Finally, the Report
undertakes an analysis of the WTO rules on subsidies. Some of the salient
findings of the Report are summarized below:

Governments extend subsidies to build infrastructure,
help struggling industries or foster new ones, promote research and develop new
knowledge, protect the environment, redistribute income and help poor consumers.

Economic theory tells us that some but not all of
these objectives are most effectively addressed by subsidies. Theory also tells
us that subsidies can distort trade by giving an artificial competitive
advantage to exporters or import-competing industries, and this can be a source
of tension among trading partners.

Concern among trading partners about subsidies rises
in direct proportion to the extent to which subsidy practices have direct trade
effects within a narrow segment of economic activity. If the effects of
subsidies are perceived as severe enough in the marketplace, they may trigger a
reaction nullifying any advantage from the subsidy.

The Report estimates that 21 developed countries spent
almost $250 billion on subsidies, while all countries spent over $300 billion.
The arithmetic average ratio of subsidies to GDP is lower in developing than
developed countries, but large variations of the ratio can be found in both
country groups. For a sample of 31 developing countries the average ratio of
subsidies to GDP was 0.6 per cent, while the comparable figure for a sample of
22 developed countries was 1.4 per cent.

Agricultural subsidies in OECD countries — both
domestic and export subsidies — show a downward trend. The available evidence
suggests industrial subsidies are most pervasive in mining, coal, steel,
forestry, fishing, shipbuilding and automotive industries. Comparable data on
the incidence of subsidies in services sectors do not exist. Incomplete evidence
suggests support measures are concentrated in the transport, tourism, banking,
telecommunications and audiovisual sectors.

Information is not solid enough to conclude that there
is any systematic downward trend in subsidies to industry and services. In some
cases, however, evidence exists of a tendency to redirect subsidies towards
“horizontal” objectives. This will generally make subsidies less distorting.

The GATT/WTO rules on subsidies have evolved
considerably over the years, becoming more precise and detailed. Competing views
exist as to whether the rules are tight enough to limit trade distorting
subsidies, or accommodating enough to allow governments to pursue their
legitimate objectives, including development.

The Report also examines 2005 trade developments and
includes four essays; on textiles and clothing trade trends, flows of
international receipts, trade trends of least-developed countries and the trade
impact of natural disasters and terrorist acts.

The Report notes that while trade growth was lower in 2005 (6.5 percent) than the preceding year (9 per cent), it was still above the
average for the last decade. A particular feature of the trade scene in 2005 was
higher commodity prices, especially oil. While higher commodity prices have
affected countries in very different ways, they nevertheless contributed to the
largest share of developing countries in world trade for over five decades. (The
trade data provided in this Report corresponds to that published on April 11, 2006 in WTO
Press/437).

While the elimination of textiles and clothing quotas
at the beginning of 2005 had a limited impact on demand and market conditions in
the major importing countries during the year, there were significant shifts in
trade shares among exporting countries.

Developed countries still dominate international
receipts and payments of royalties and licence fees, although the share of a
number of Asian developing countries is on the increase. These transactions may be seen as a somewhat imperfect
indicator of high-technology investment and production.

The least-developed countries (LDCs) have increased
their share in world trade, driven in large measure by commodity price
increases. The trade performance of individual LDCs has been very mixed and some
35 per cent of total LDC trade is accounted for by only two countries, while
thirteen LDCs account for less than one per cent of the total.

Natural disasters and acts of terrorism can take a
terrible toll on human life, but the trade effects of such events tend to be
small and often short-lived. Impacts are frequently concentrated on particular
industries, although the cost implications of additional security measures aimed
at preventing terrorist acts are more broad-based.